Usio, Inc. (formerly Payment Data Systems, Inc.) — Q2 2011 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2011. The company provided electronic payment processing services, including credit, debit, ACH, prepaid card, and online bill-payment services. The financial statements were unaudited. As of August 15, 2011, 142.7 million common shares were outstanding.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Revenue | $768,359 | $1,553,620 |
| Cost of services | $598,542 | $1,209,502 |
| Gross profit | $169,817 | $344,118 |
| Approximate gross margin | 22.1% | 22.1% |
| Operating loss | $(169,084) | $(313,101) |
| Approximate operating margin | (22.0%) | (20.2%) |
| Net loss | $(238,481) | $(382,498) |
| Approximate net margin | (31.0%) | (24.6%) |
| Net cash used in operating activities | Not provided for the quarter | $(655,038) |
- Cash and cash equivalents were $318,471 at June 30, 2011, down from $978,699 at December 31, 2010.
- Total assets were $1.27 million, versus $1.98 million at year-end 2010.
- Current liabilities were $1.58 million against current assets of $516,422, indicating a substantial working-capital deficit.
- Stockholders’ equity was negative $307,423, compared with negative $134,309 at December 31, 2010.
- No conventional debt balance was separately reported in the balance sheet; accrued expenses were $1.04 million, including $712,882 of accrued salaries and $205,400 reserved for merchant losses.
- The company held a related-party receivable of $702,337, primarily representing unpaid obligations of executives under prior employment agreements.
- Net cash used in investing activities was $5,190. There were no financing cash flows during the first six months.
Material changes versus the prior comparable period
- Second-quarter revenue increased 27% from $604,184 to $768,359; six-month revenue increased 29% from $1.21 million to $1.55 million. Management attributed the growth to more customers and higher card and ACH transaction volume.
- Cost of services increased 30% in the quarter and 28% for the six-month period, broadly tracking increased processing volume.
- Operating loss widened in the second quarter to $169,084 from $152,338, but improved for the six-month period to $313,101 from $346,683 because of revenue growth and lower depreciation.
- Second-quarter net loss increased substantially to $238,481 from $55,174. The six-month net loss increased to $382,498 from $195,228.
- The 2011 periods included a $91,738 unrealized loss on trading marketable securities and $22,341 of other income. The 2010 comparable periods benefited primarily from a $100,000 quarterly and $160,000 six-month legal settlement.
- Operating cash use increased to $655,038 from $149,567, primarily because customer deposits payable declined by $504,715, in addition to operating losses and overhead costs.
- Marketable securities declined to $7,977 from $99,716 at year-end 2010.
Outlook, risks, contingencies, and unusual items
- Management stated that available cash and anticipated revenues may be insufficient to meet cash needs for the foreseeable future. The company’s ability to continue as a going concern was described as likely contingent on additional equity or debt financing or achieving positive operating cash flow.
- The company was pursuing strategic financing alternatives. Its Dutchess equity line had remaining stated capacity, but no shares were sold under the facility during 2010 or the first six months of 2011 because the related registration statement had become stale.
- Additional equity or convertible-debt financing could dilute shareholders; debt financing, if available, could impose restrictive covenants. The filing stated that financing might not be available on acceptable terms, or at all.
- The company had incurred operating losses every quarter since inception and reported an accumulated deficit of approximately $55.1 million.
- Card-processing activities expose the company to merchant chargeback and credit risk. The merchant-loss reserve was $205,400, and management noted that the reserve may increase as transaction volume grows.
- The company reported approximately $42.3 million of federal net operating loss carryforwards as of December 31, 2010, but maintained a full valuation allowance against deferred tax assets.
- Four restricted stock issuances for consulting services were reported on May 17, 2011, totaling 969,389 shares and $25,000 of recorded expense.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, no senior-security defaults, and no material off-balance-sheet arrangements.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Liquidity and going concern: Verify the company’s ability to obtain financing or generate positive cash flow given $318,471 of cash, negative working capital, and continued operating losses.
- Related-party receivable: Assess the collectability and terms of the $702,337 receivable from executives and the related $550,964 of deferred executive salaries included in accrued expenses.
- Cash conversion: Determine whether the sharp operating cash outflow was primarily timing-related customer deposits or reflects a persistent cash deficit.
- Processing economics: Monitor whether revenue growth continues to exceed variable processing-cost growth and whether gross margins remain near 22%.
- Shareholder dilution: Review subsequent equity issuances, equity-line activity, and potential dilution from financing needs and outstanding equity awards.
- Merchant risk: Verify the adequacy of chargeback reserves and the company’s exposure to merchant insolvency or transaction losses.